A longer version of this article can be read at RSM US LLP.
Many banks are considering acquiring or partnering with existing fintechs to gain access to cutting-edge technologies and remain competitive in the crowded financial services marketplace.
There are many advantages to working with fintech partners to launch newer services and operations, but failing to properly select and manage partners or new acquisitions can have the opposite effect: additional risks, unforeseen exposures and unnecessary costs. Partnership opportunities may be a focus for leadership teams, given the significant growth and investments in the fintech space over the last decade. Consumer adoption is up: 88% of U.S. consumers used a fintech in 2021, up from 58% in 2020, according to Plaid’s 2021 annual report; conventional banks’ market share continues to drop.
Planning is everything when partnering with or acquiring a fintech company. Here are seven key actions and areas of consideration for banks looking for such partnerships.
1. Understand your customers on a deeper level: The first step before considering a fintech partner or acquisition is to understand what your consumers truly want and how they want those services delivered. Companies can pinpoint these needs via surveys, customer focus groups, call centers or discussions and information-gathering with employees.
Organizations should also explore the needs of individuals and entities outside their existing customer bases. Gathering data that helps them learn about their customers’ needs, lifestyle preferences and behaviors can help banks pinpoint the right technology and delivery channel for their situation.
2. Understand leading-edge technological advancements: While fintech partnerships can give a traditional bank access to new cutting-edge technologies, leaders still need to understand these technologies and the solutions. This might involve helping teams gain fluency in topics such as artificial intelligence that can improve credit decisioning, underwriting processes and fraud detection, automation that speeds up service delivery responses and customer onboarding, data analysis and state-of-the-art customer relationship management tools and more.
3. Prepare for culture shock: Fintechs, particularly those in start-up mode, will be used to operating at a different pace and with a different style than typical banks. Fintechs may behave more entrepreneurially, trying many experiments and failing often and fast. This entrepreneurial mindset has implications for how projects are organized, managed, measured, staffed and led.
4. Take a 360-degree view of risk: Fintechs may not have been subject to the same strict compliance as banks, but as soon as they enter a partnership, they must adhere to the same standards, regulations and controls. Any technology-led, third-party partnership comes with the potential for additional risks in areas such as cybersecurity, data privacy, anti-money laundering and myriad other regulatory compliance risks. Banks need to have a solid understanding of the viability and soundness of the fintech they might partner with, as well as the strength and agility of the leadership team. They should also ensure the new relationship has adequate business continuity and disaster recovery plans.
From vendor selections and background checks to mutual security parameters and decisions around where servers will be located, all potential exposures are important for banks to assess. A new fintech relationship could open new avenues for outside threats, information breaches and reputation damage.
5. Don’t underestimate the management lift needed:Acquiring or partnering with a fintech or third-party vendor involves significant management work to meet customer needs, keep implementation costs in line and merge technologies to ensure compatibility between the two organizations.
Employees at each company will likely have different approaches to innovation, which is one of the major benefits of teaming up with a fintech company; your organization can rapidly gain access to cutting-edge technologies and the overall agility of a startup. But management needs to ensure that this union doesn’t inadvertently create heartburn among employees on both sides.
6. Build ownership through clear accountability and responsibility: A fintech partnership requires management and oversight to be effective. Banks should consider the ownership and internal staffing requirements needed to achieve the full value of their investment with a fintech organization.
Don’t underestimate the time and effort needed to develop and deploy these plans. Based on the automation levels of the solution implemented, these resources may need dedicated time on an ongoing basis for the oversight and operations of the solution as well.
7. Stick to a plan:While in a hurry to launch a service, leadership teams may gloss over the whole steps of the plan and critical items may fall off. To combat this, banks should have a robust project plan that aligns with the overall innovation strategy and clear definitions around who is responsible for what. A vendor management program can help with this, along with strategic change management planning.
Balancing the demands of innovation with a thorough and thoughtful approach that considers customer behaviors, risks, resources and plans for new solutions will make fintech partnerships go as smooth as possible. Institutions would do well to incorporate these seven key areas throughout the process of a potential third-party partnership to ensure the maximum return on investment.